Annual Financial Report
City Merchants High Yield Trust Limited
Annual Financial Report Announcement
For the period ended 31 December 2012
.
Financial Information
City Merchants High Yield Trust Limited (new CMHYT, the Company) was
incorporated on 19 December 2011 and commenced trading on 2 April 2012,
following the scheme of reconstruction and voluntary winding up of City
Merchants High Yield Trust plc (CMHYT plc) on 30 March 2012.
The terms of the reconstruction allow direct comparison of the Company's
financial information with CMHYT plc's financial information prior to 2012
extracted from that company's audited Annual Financial Reports.
The combined performance figures for the year to 31 December 2012 are shown for
information purposes. This combined performance is made up of the performance
of CMHYT plc from 1 January to 30 March 2012, which is unaudited, and the
performance of its successor, new CMHYT, from then until 31 December 2012.
Performance Statistics
CMHYT plc New CMHYT Combined CMHYT plc
1 Jan to 2 Apr to 1 Jan to 1 Jan to
30 Mar 31 Dec 31 Dec 31 Dec
2012 2012 2012 2011
Total Return
Total return NAV % 10.4% 13.2% 24.5% -7.6%
FTSE All-Share Index* 6.1% 5.8% 12.3% -3.5%
FTSE Government Securities - All Stocks -1.7% 4.5% 2.7% 15.6%
Index*
Capital Return
Net asset value per share 7.0% 9.9% 17.7% -13.9%
FTSE All-Share Index* 5.1% 3.0% 8.2% -6.7%
FTSE Government Securities - All Stocks -2.9% 2.0% -0.9% 11.0%
Index*
Movement in mid-market price per share 9.9% 1.8% 11.9% -15.0%
Ongoing Charges 1.07% 1.08%
Period End Information
New CMHYT CMHYT CMHYT plc
31 Dec 2012 plc 31 Dec
30 Mar 2011
2012
Net asset value per share 171.29p 155.82p 145.56p
Mid-market price per share 164.50p 161.62p 147.00p
Discount/(premium) per share 4.0% (3.7%) (1.0%)
Gearing
Gross gearing nil nil nil
Net cash 4.1% 1.4% 5.2%
*Source: Thomson Reuters Datastream
.
Chairman's Statement
My statement in the 2011 annual report of City Merchants High Yield Trust plc
(CMHYT plc) set out proposals for the transfer of the assets of that company to
City Merchants High Yield Trust Limited (the `new Company'), a Jersey resident
company, in exchange for shares. These proposals were intended to enable the
continued delivery of tax efficient investment returns to shareholders from
high-yielding fixed-interest securities and put shareholders in a position
equivalent to previous years, by increasing the net distributable income as
compared with that achievable had CMHYT plc continued. These proposals were
implemented on 2 April 2012 and I am pleased to report that the new Company is
operating satisfactorily.
The terms of the re-domicile allow direct comparison of the new Company's
financial information from 2 April 2012 with CMHYT plc's financial information
prior to that date. In the 12 months to 31 December 2012, the total NAV return
was 24.5% which compares favourably with the average return of 12.4% from the
funds in the Investment Management Association Sterling Strategic Bond sector.
Further return statistics are shown and an unaudited statement of comprehensive
income is included showing the contributions of CMHYT plc and the new Company
over the 12 months to 31 December 2012.
Disappointingly the total return on the Company's share price did not match the
NAV return as the shares were quoted at a discount to NAV for most of 2012. The
Board keeps the discount under review. Some share price volatility is to be
expected under current market conditions and we would expect the Company's
discount to reduce from its current level.
An analysis of the total and capital returns for CMHYT plc and the new Company
is shown in the performance statistics and a summary of the market background
and investment strategy followed in the year are set out in the Manager's
Investment Report following my statement.
The new Company continues to produce an attractive level of income for
shareholders and I am pleased to report that your Board has been able to meet
its target, as set out in the prospectus dated 23 February 2012, of declaring
aggregate dividends of 10p per share in respect of the year to 31 December
2012. This comprised a special dividend paid by CMHYT plc in March 2012 and
interim dividends of 2.6p, 2.5p and 2.5p paid by the new Company in August
2012, November 2012 and February 2013, respectively. The Board continues to
target total dividends at the same level for the current year.
The Board believes the portfolio remains well-positioned to continue to provide
opportunities for modest growth while producing an attractive level of income
for shareholders.
Annual General Meeting (AGM)
The AGM will be held at the offices of R&H Fund Services (Jersey) Limited,
Ordnance House, 31 Pier Road, St Helier, Jersey JE4 8PW, at 10.30am on 13 June
2013. Since this is the first AGM of the new Company, all of the Directors will
submit themselves for election by shareholders. In addition to this, and the
usual ordinary resolutions to receive this annual report and re-elect the
auditor, there are four items of special business as follows:
1. Continuation of the Company (ordinary resolution 8)
The Articles of Association require that an ordinary resolution to continue the
Company be put to shareholders each year.
2. Issuance of New Shares
Although Jersey law does not require shareholder approval for issues of shares,
the Directors expressed an intention in the new Company's prospectus to request
that the authority to allot shares for cash on a non-pre-emptive basis is
renewed at each AGM. Special Resolution 9 accordingly seeks to renew the
Directors' authority to issue up to 10% of the Company's issued ordinary shares
without pre-emption. The Directors will not issue shares at a price which is
less than the NAV attributable to the shares, so as not to dilute the interests
of existing shareholders.
3. Share Buybacks
Special Resolution 10 is to renew the authority to buy back up to 14.99% of the
Company's issued ordinary shares, subject to restrictions referred to in the
Notice of AGM, where the Board believes it is in shareholders' interests to do
so.
4. Calling General Meetings at 14 days' Notice
Special Resolution 11 is an annual resolution that enables the Company to call
general meetings (older than AGMs) on 14 days' notice if the Board believes it
to be in the interests of shareholders.
Mainland Shareholder Meeting
Shareholders should note that in addition to the AGM in Jersey an opportunity
is being provided to hear from the portfolio managers and pose questions to
them and on the annual report at a meeting to be held in London at 2.30pm on 10
June 2013. This additional shareholder meeting will be held in Invesco
Perpetual's offices at 30 Finsbury Square, London EC2A 1AG.
Clive Nicholson
Chairman
28 March 2013
.
Manager's Investment Report
Market Background
High yield bonds achieved very strong total returns in 2012, benefitting from
capital appreciation as well as the high levels of yield they carried into the
period. Throughout the year, investor risk appetite was boosted by actions and
announcements of policymakers that were designed to address the debt problems
in the Eurozone, support the banking system and stimulate economic growth.
Under its new president, Mario Draghi, the European Central Bank (ECB) has
offered much greater support for Eurozone member states' sovereign bond markets
and has also addressed funding concerns in the banking system, moving the bank
closer to providing the single currency area with a lender of last resort.
European political leaders have agreed plans for a single banking authority for
the currency area. All of the major central banks have maintained very low
interest rates, by historical comparison, and extended their various programmes
of quantitative easing. In the corporate sector, fundamentals have remained
solid and many companies have been able to take advantage of the strong
conditions in the credit markets and the easy monetary conditions to reduce
their cost of capital. Meanwhile, economic growth has been subdued. The US
economy has continued to grow at a modest level and there are signs from the
housing market and from consumer lending statistics to encourage belief in a
sustained recovery. But in Europe the outlook has remained poor. Levels of
business activity and sentiment are consistent with very low or negative growth
while high unemployment and low earnings growth hold out little hope of a rapid
expansion in consumption.
According to data from Merrill Lynch, European non-financial high yield
(non-investment grade) bonds had a total return for the year of 19.4% (all
returns in sterling terms). The aggregate yield for the asset class fell 441
basis points, from 9.57% to 5.16%. This return compares to 15.8% for sterling
investment grade corporate bonds, 2.8% for gilts and 1.5% for bunds. Within
investment grade, financials strongly outperformed, reflecting the improved
sentiment on the banking system. Sterling financials returned 23.4% compared to
10.2% for non-financials. Subordinated bank capital was the strongest part of
the sterling financial sector, with Tier 1 debt returning 30.7% and Lower Tier
2 31.3%.
The default rate in European high yield bonds remains low. According to
Moody's, the European trailing 12-month high yield default rate was 1.8% in
December 2012, down from 3.3% a year before. The rate of corporate debt
issuance was high. Barclays estimate there was a total of £46 billion in new
high yield supply across European currencies, the highest annual total they
have recorded. The contrast with 2011 is quite stark, with even peripheral
Eurozone high yield issuers successfully tapping the market in 2012. For
example, in recent months Portugal Telecom (BB+) issued a 2018 bond with a
coupon of 5.875% and Rottapharm (BB-) issued a 2019 bond with a coupon of
6.125%. Both bonds closed the year priced above par. Investment grade issuance
reached its highest level since 2009 at over £400 billion.
Portfolio Strategy
As mentioned in the Chairman's Statement, the Company is the successor vehicle
to City Merchants High Yield Trust plc (CMHYT plc) following its re-domicile to
Jersey. It retains the same investment objectives, portfolio managers and
investment portfolio. Consequently this report covers the 12 months to 31
December 2012, even though the re-domicile was enacted on 30 March 2012. Over
the 12 months to 31 December 2012, and using the NAV of CMHYT plc at 31
December 2011, the NAV total return for the ordinary shares of the Company was
24.5% and the NAV rose by 25.73 pence to 171.29 pence. For the trading period 2
April to 31 December 2012, the NAV total return was 13.2%. A total dividend of
10 pence has been paid for the year to 31 December 2012, including the special
dividend of 2.4 pence paid by CMHYT plc. After the poor market conditions of
the latter months of 2011, the portfolio managers believed that there were very
attractive opportunities across the high yield bond market as well as in areas
of investment grade, especially financials. They were comfortable with
increasing credit risk in the portfolio in order to lock in the value they saw.
This strategy allowed the Company to benefit from the strong market rally seen
over the course of the year.
Gearing was not employed during the period. The portfolio managers are not
currently anxious to draw down on the Company's loan facility but in a market
correction they may get the opportunity to add value and help to build reserves
by doing so.
During the year, the portfolio managers trimmed positions into strength,
selling bonds that had achieved strong capital returns, and bought in periods
of relative weakness to capture yields they thought would be attractive
additions to the portfolio. They added to holdings in convertible bonds as they
were attracted to income opportunities available in this market. More
investment in convertibles might be considered, and possibly some direct equity
investment, over the course of 2013.
The portfolio managers have continued to favour financials, subordinated
capital in particular, despite the considerable falls in yield seen, and
increased the portfolio's exposure to banks over the period. While systemic
concerns have been addressed by central bank action, the banks have also made
more progress in strengthening their balance sheets, raising capital and
increasing liquidity. Many banks have taken advantage of their stronger funding
to restructure their liabilities, tendering to buy back uneconomic outstanding
debt. This will help them satisfy changing regulatory requirements. These
exercises have provided an extra support to the market in bank debt.
Outlook
Credit markets have been very strong over the last year and yields have fallen
a long way from the levels they reached in 2011. The portfolio managers think
that a lot of the market is quite fully valued at current yields, that large
areas of the non-financial investment grade market are looking expensive and
that a lot of the capital gain in high yield bonds is already priced-in.
Default rates are predicted to remain low and there has been strong demand for
the income high yield offers, with a lot of money entering the asset class in
2012. However, there are some signs of poorer quality issuance in the recent
strong market conditions and the market could be susceptible to any
macroeconomic deterioration.
The portfolio managers expect financials to outperform the wider bond market
again in 2013. They have believed for a long time that the process of capital
structure and balance sheet repair by banks and other financials will be good
for creditors. However, banks still face challenges. November's Financial
Stability Report, issued by the Bank of England, highlights the prospect that
UK banks will have to raise additional capital and some are seeking to wind
down or exit investment banking operations. While generally not good news for
equity investors, these are positives for bondholders. Progress continues to be
made on bank balance sheet repair. Tier 1 capital levels have risen across the
European banking sector in 2012 and loan to deposit ratios have declined. The
strong performance of this sector over the last year means that yields have
fallen and credit spreads have tightened considerably. However, yields remain
attractive, in the portfolio managers' view, especially compared to the low
yields available in high quality non-financial corporate bonds and in gilts.
The portfolio managers do not expect core government bond yields to rise
rapidly in coming quarters. They do expect that at some point in the next few
years interest rates will normalise, but core government yields could rise 200
basis points and still be unattractive. It is likely that the portfolio
managers will need to consider some strategies to hedge the risk such a move
would pose to the capital value of the portfolio.
Overall, the portfolio managers think that fixed interest returns in 2013 will
probably be positive but unspectacular. They expect some parts of the corporate
bond market to see even lower yield levels. While they can still see some
opportunities for capital return, a lot of the market is not particularly
attractive, in their opinion, and income is likely to be the dominant factor in
total return.
Invesco Asset Management Limited
Manager
Paul Read Paul Causer
Portfolio Managers
28 March 2013
.
Investments in Order of Valuation
at 31 December 2012
Moody/ Market
S&P Country of Value % of
Issuer Issue Rating Sector Incorporation £'000 Portfolio
LBG Capital 7.975% 15 Sep B1/BB Financials UK 3,764 3.20
2024
6.385% 12 May Ba3/BB+ 1,210 1.03
2020
9% 15 Dec 2019 Ba3/BB+ 1,071 0.91
6.439% 23 May B1/BB 803 0.68
2020
16.125% 10 Dec Ba3/BB+ 141 0.12
2024
6,989 5.94
Société 8.875% FRN Ba2/BBB- Financials France 4,184 3.56
Genérale Perpetual
Premier 89.2P Cum Cnv NR/NR Industrials UK 3,814 3.25
Farnell Red Prf
General Motors Warrants 10 Equity Consumer USA 3,325 2.83
Jul 2019 Goods
Warrants 10 Equity 360 0.31
Jul 2016
3,685 3.14
Aviva 6.125% A3/BBB Financials UK 3,414 2.90
Perpetual
Vedanta 4% Cnv 30 Mar NR/BB Basic UK 2,148 1.83
Resources 2017 Materials
8.25% 07 Jun Ba3/BB 678 0.58
2021
2,826 2.41
Intesa 8.375% FRN Ba2/BB+ Financials Italy 2,622 2.23
Sanpaolo Perpetual
Cemex - S.A.B. 4.875% Cnv 15 NR/NR Consumer Mexico 1,991 1.69
Mar 2015 Goods
- España 9.25% 12 May NR/B- Spain 574 0.49
2020
2,565 2.18
Credit 7.589% FRN Ba2/BBB- Financials France 2,001 1.70
Agricole Perpetual
8.125% FRN Ba2/BBB- 511 0.44
Perpetual
2,512 2.14
Balfour Beatty 10.75P Gross NR/NR Industrials UK 2,269 1.93
Cum Cnv Red
Prf
Abengoa 6.875% Cnv 24 NR/NR Industrials Spain 1,144 0.97
Jul 2014
8.5% 31 Mar B1/B+ 821 0.70
2016
4.5% Cnv 03 NR/NR 300 0.26
Feb 2017
2,265 1.93
REA Finance Consumer Netherlands 2,090 1.78
Goods
SSE 5.453% Baa2/NR Utilities UK 2,084 1.77
Perpetual
Barclays 9.25% Ba1/BBB Financials UK 1,069 0.91
Perpetual
6.625% 30 Mar Baa3/ 955 0.81
2022 BBB+
2,024 1.72
American 8.625% FRN 22 Baa2/BBB Financials USA 1,203 1.02
International May 2068
Group
8.175% FRN 15 Baa2/BBB 803 0.68
May 2068
2,006 1.70
DFS Furniture 9.75% 15 Jul B2/B+ Consumer UK 1,940 1.65
2017 Goods
Enterprise 6.5% 06 Dec NR/BB- Consumer UK 1,936 1.65
Inns 2018 Goods
Catlin 7.249% FRN NR/BBB+ Financials USA 1,932 1.64
Insurance Perpetual
Citigroup 6.829% FRN 28 Ba2/BB Financials USA 1,841 1.57
Jun 2067
US Common Equity 48 0.04
Stock
1,889 1.61
First Hydro 9% 31 Jul 2021 NR/NR Utilities UK 1,883 1.60
Finance
Unitymedia 9.625% 01 Dec B3/B- Consumer Germany 1,820 1.55
Kabel 2019 Services
Obrascon 8.75% 15 Mar Ba2/NR Industrials Spain 1,755 1.49
Huarte Lain 2018
INEOS Finance 9.25% 15 May B1/B+ Basic UK 1,735 1.48
2015 Materials
Santos Finance 8.25% FRN 22 NR/BB Oil and Gas Australia 1,711 1.46
Sep 2070
Origin Energy 7.875% FRN 16 Baa3/BB Oil and Gas Australia 1,703 1.45
Jun 2071
RWE 4.625% FRN Baa2/ Utilities Germany 1,651 1.41
Perpetual BBB-
UBS Capital 8.836% FRN Ba2/BBB- Financials UK 1,634 1.39
Securities Perpetual
AXA 5.25% FRN 16 A3/BBB Financials France 845 0.72
Apr 2040
6.379% FRN Baa1/ 603 0.51
Perpetual BBB-
1,448 1.23
Iron Mountain 6.75% 15 Oct B1/B+ Support USA 1,444 1.23
2018 Services
Standard Life 6.75% VAR A3/A- Financials UK 1,055 0.90
Perpetual
5.5% VAR 04 Baa2/BBB 368 0.31
Dec 2042
1,423 1.21
General 8.875% Cum NR/NR Financials UK 1,380 1.18
Accident Irrd Prf
Campofrio Food 8.25% 31 Oct Ba3/BB- Consumer Spain 1,302 1.11
2016 Goods
Wind 11.75% 15 Jul B3/B+ Consumer Luxembourg 637 0.54
Acquisition 2017 Services
Finance
7.375% 15 Feb Ba3/BB- 635 0.54
2018
1,272 1.08
Intergen 9.5% 30 Jun Ba3/BB- Oil and Gas Netherlands 1,251 1.06
2017
Unicredit 8.125% FRN Ba2/BB+ Financials Luxembourg 802 0.68
International Perpetual
Bank
8.5925% FRN Ba2/BB+ 440 0.38
Perpetual
1,242 1.06
Suez 4.82% FRN Baa2/NR Utilities France 1,237 1.05
Environment Perpetual
Bank of 6.125% 15 Sep Baa2/A- Financials USA 1,173 1.00
America 2021
Boparan 9.875% 30 Apr Ba3/B+ Consumer UK 1,134 0.96
Finance 2018 Goods
TMF FRN 01 Dec B1/B Financials Netherlands 607 0.52
2018
9.875% 01 Dec Caa1/ 482 0.41
2019 CCC+
1,089 0.93
Thames Water 7.75% 01 Apr B1/NR Utilities UK 1,087 0.92
2019
Novae 6.5% 27 Apr Baa3/NR Financials UK 1,073 0.91
2017
Gala Finance 8.875% 01 Sep B3/B+ Consumer UK 1,055 0.90
2018 Services
Direct Line 9.25% FRN 27 Baa1/ Financials UK 1,052 0.90
Insurance Apr 2042 BBB+
Southern Water 8.5% 15 Apr NR/BB- Utilities UK 1,047 0.89
2019
RSA Insurance 8.5% FRN Baa1/A- Financials UK 949 0.81
Perpetual
Alcatel-Lucent 6.45% 15 Mar WR/CCC+ Technology USA 466 0.40
2029
6.5% 15 Jan WR/CCC+ 461 0.39
2028
927 0.79
Santander 11.3% FRN Ba3/BB Financials Spain 523 0.45
Perpetual
7.3% FRN 27 Baa3/ 399 0.34
Jul 2019 BBB-
922 0.79
BES Finance 3.5% Cnv 06 NR/BB- Financials Luxembourg 647 0.55
Dec 2015
6% FRN 07 Feb Ba3/BB- 272 0.23
2035
919 0.78
CGG Veritas 7.75% 15 May Ba3/BB- Oil and Gas France 895 0.76
2017
Peabody Energy 4.75% Cnv 15 Ba3/B+ Basic USA 880 0.75
Dec 2066 Materials
Commerzbank 7.75% 16 Mar Ba1/BBB Financials Germany 870 0.74
2021
Bormioli Rocco 10% 01 Aug B1/BB- Consumer Luxembourg 861 0.73
2018 Goods
Algeco 9% 15 Oct 2018 B1/NR Consumer UK 837 0.71
Services
Pipe 9.5% 01 Nov B3/B Basic UK 836 0.71
2015 Materials
Nara Cable 8.875% 01 Dec B1/B+ Consumer Ireland 825 0.70
Funding 2018 Services
Virgin Media 8.875% 15 Oct Ba2/BB- Consumer UK 761 0.65
Finance 2019 Services
Nexans 2.5% Cnv 01 NR/BB Industrials France 407 0.35
Jan 2019
1.5% Cnv 01 NR/NR 279 0.24
Jan 2013
686 0.59
Chrysler 8% 15 Jun 2019 B2/B Consumer USA 672 0.57
Goods
Phoenix Life 7.25% Baa3/BBB Financials UK 636 0.54
Perpetual
BNP Paribas Cnv FRN Ba3/BB Financials Belgium 629 0.54
Fortis Perpetual
Numericable FRN 15 Oct B2/B Consumer Luxembourg 623 0.53
Finance 2018 Services
Cirsa Finance 8.75% 15 May B3/B+ Consumer Luxembourg 600 0.51
2018 Goods
Ecclesiastical 8.625% Non Cum NR/NR Financials UK 587 0.50
Insurance Irrd Prf
M&G Finance 7.5% FRN NR/NR Industrials Luxembourg 579 0.49
Perpetual
Taylor Wimpey 10.375% 31 Dec B1/BB- Consumer UK 555 0.47
2015 Services
Care UK Health 9.75% 01 Aug B3/B Health Care UK 535 0.46
and Social 2017
Care
Standard 9.5% FRN A3/A- Financials UK 340 0.29
Chartered Perpetual
8.125% Non Cum Baa2/ 193 0.16
Red Prf BBB+
533 0.45
Peel 8.375% 30 Apr NR/NR Financials UK 527 0.45
2040
Odeon & UCI 9% 01 Aug 2018 B3/B Consumer UK 518 0.44
Finco Services
Gategroup CHF5 Equity Consumer Switzerland 518 0.44
Goods
Zinc Capital 8.875% 15 May B2/B+ Industrials Luxembourg 516 0.44
2018
Legal & 6.385% FRN Baa2/ Financials UK 516 0.44
General Perpetual BBB+
Matalan 8.875% 29 Apr B1/BB- Consumer UK 515 0.44
Finance 2016 Services
Bakkavor 8.25% 15 Feb B2/B- Consumer UK 510 0.43
Finance 2 2018 Goods
Eileme 2 11.75% 31 Jan B3/B- Consumer Sweden 473 0.41
2020 Services
Travelport 11.875% 01 Sep Caa3/CCC Industrials USA 286 0.24
2016
10.875% 01 Sep Caa3/CCC 160 0.14
2016
446 0.38
EDP Finance 8.625% 04 Jan Ba1/BB+ Utilities Netherlands 445 0.38
2024
Jaguar Land 8.125% 15 May Ba3/BB- Consumer UK 442 0.38
Rover 2018 Goods
ALBA 8% 15 May 2018 B3/B Industrials Germany 438 0.37
Xefin 8% 01 Jun 2018 Ba3/B+ Industrials Luxembourg 434 0.37
Lottomatica 8.25% FRN 31 Ba2/BB Consumer Italy 427 0.36
Mar 2066 Services
Fiat Finance & 6.375% 01 Apr B1/BB- Consumer Luxembourg 417 0.35
Trade 2016 Goods
Mark IV Europe 8.875% 15 Dec Ba3/BB- Industrials Luxembourg 391 0.33
2017
Principality 7% Perpetual B1/NR Financials UK 390 0.33
Building
Society
Telenet 6.75% 15 Aug Ba3/B+ Consumer Luxembourg 216 0.18
Finance 2024 Services
6.25% 15 Aug Ba3/B+ 172 0.15
2022
388 0.33
Ono Finance II 11.125% 15 Jul Caa1/B- Consumer Ireland 387 0.33
2019 Services
Rain Cii 8.5% 15 Jan B1/BB- Industrials USA 377 0.32
Carbon 2021
Schaeffler 8.5% 15 Feb Ba3/B+ Industrials Netherlands 346 0.30
Finance 2019
Codere 8.25% 15 Jun Caa2/CCC Consumer Luxembourg 334 0.28
2015 Services
Beverage 9.5% 15 Jun Caa2/ Industrials Luxembourg 295 0.25
Packaging 2017 CCC+
Ciech 9.5% 30 Nov B2/B Basic Poland 292 0.25
2019 Materials
Skipton 10% FRN 12 Dec Ba2/NR Financials UK 253 0.23
Building 2018
Society
Aperam 7.75% 01 Apr B3/B+ Industrials Luxembourg 216 0.18
2018
Lecta 8.875% 15 May B1/B+ Industrials Luxembourg 216 0.18
2019
Rothschilds 1% FRN NR/NR Financials Netherlands 216 0.18
Continuation Perpetual
Finance
SPCM 5.5% 15 Jun NR/BB Basic France 215 0.18
2020 Materials
KM Germany 8.75% SNR 15 B2/B- Financials Germany 203 0.17
Dec 2020
KP Germany 11.625% 15 Jul Caa1/CCC Industrials Germany 180 0.15
Erste 2017
Investec 7.075% VAR B1/NR Financials UK 139 0.12
Perpetual
FAGE 9.875% 01 Feb B3/B Consumer Greece 115 0.10
International 2020 Goods
Brazilian Common Stock Equity Oil and Gas Canada 112 0.10
Resources
Pearl 6.5864% FRN NR/NR Financials UK 111 0.09
Perpetual
Motors Unit Trust Equity Consumer USA 111 0.09
Liquidation Goods
Hellermann FRN 15 Dec B2/B+ Industrials UK 90 0.08
Tyton Finance 2017
Pittards Ordinary Equity Consumer UK 82 0.07
shares Goods
Corero Network Ordinary Equity Technology UK 67 0.06
Securities shares
Rivington 8% Cnv 30 Jun NR/NR Financials UK 50 0.04
2015
0% Cnv 13 Dec NR/NR 3 -
2013
53 0.04
Cattles 7.125% 05 Jul NR/NR Financials UK 31 0.03
2017
6.875% 17 Jan NR/NR 3 -
2014
34 0.03
Pfleiderer 7.125% FRN WR/NR Industrials Netherlands 5 -
Finance Perpetual
Welsh Power C' Shares Equity Utilities UK 2 -
Unquoted
GMA Resources Ordinary Equity Basic UK 1 -
shares Materials
117,527 100.0
Abbreviations used in the above valuation:
Cnv: Convertible Nts: Notes
Cum: Cumulative Prf: Preference
FRN: Floating Red: Redeemable
Rate Note
Irrd: Irredeemable VAR: Variable
.
Principal Risks and Uncertainties
Investment Objective
There can be no guarantee that the Company will meet its investment objective.
As part of the Company's overall strategy, the Board seeks to manage the
Company's affairs so as to maximise returns for shareholders.
Market Risk
The majority of the Company's investments are traded on a number of the world's
major securities markets. The principal risk for investors in the Company is of
a significant fall in the markets and/or a prolonged period of decline in the
markets relative to other forms of investment. The value of investments held
within the portfolio is influenced by many factors including the general health
of the world economy, interest rates, inflation, government policies, industry
conditions, political and diplomatic events, tax laws and environmental laws
and by changing investor demand. The Manager strives to maximise the return
from the investments held but these investments are influenced by market
conditions and the Board acknowledges the effects of external influences on
portfolio performance.
Investment Risk
Portfolio performance is substantially dependent on the performance of
fixed-interest and high-yielding stocks in the UK and elsewhere in the
Company's investment universe. These stocks are particularly influenced by
prevailing interest rates, government monetary policy and by demand for income.
Risk management is an integral part of the investment management process. The
Manager controls risk by ensuring that the Company's portfolio is appropriately
diversified and by in-depth and continual analysis of the fundamentals of all
holdings, which give the Manager a full understanding of the financial risks
associated with any particular stock.
The performance of the Manager is carefully monitored by the Board and the
continuation of the Manager's mandate is reviewed each year. The Board and the
Manager maintain an active dialogue with the aim of ensuring that the market
rating of the Company's shares reflects the underlying NAV and buy back and
issuance facilities help the management of this process.
For a fuller discussion of the economic and market conditions facing the
Company and the current and future performance of the portfolio of the Company,
see both the Chairman's Statement and Manager's Investment Report.
High-Yield Fixed-Interest Securities
High-yield fixed-interest securities are subject to credit, interest rate,
liquidity and duration risks. Adverse changes in the financial position of an
issuer or in general economic conditions may impair the ability of the issuer
to make payments of principal and interest or may cause the liquidation or
insolvency of an issuer.
The majority of the Company's portfolio consists of non-investment grade
securities. To the extent that the Company invests in non-investment-grade
securities, the Company may realise a higher current yield than the yield
offered by investment-grade securities. On the other hand, investments in such
securities involve a greater volatility of price and a greater risk of default
by the issuers of such securities, with consequent loss of interest payments
and principal. Non-investment grade securities are likely to have greater
uncertainties of risk exposure to adverse conditions and will be speculative
with respect to an issuer's capacity to meet interest payments and repay
principal in accordance with its obligations. A lack of liquidity in
non-investment grade securities may make it difficult to rebalance the
Company's investment portfolio as and when the portfolio managers believe it
would be advantageous to do so. To mitigate these risks, the portfolio managers
actively monitor both the ratings and liquidity of the fixed-interest
securities taking into account the Company's financing requirements.
Further details of the risk management policies and procedures as they relate
to the financial assets and liabilities of the Company are explained in note 18
to the financial statements.
Foreign Exchange Risk
The movement of exchange rates may have unfavourable or favourable impact on
returns as the majority of the assets are non-sterling denominated. This risk
can be mitigated by the use of hedging and by the use of non-sterling
denominated borrowing. The foreign currency exposure of the Company is
monitored by the Manager on a daily basis and reviewed at Board meeings.
Gearing
Performance may be geared by means of the Company's credit facility. There is
no guarantee that this facility will be renewable at maturity on terms
acceptable to the Company. If it were not possible to renew this facility or
replace it with another, any amounts owing by the Company would need to be
funded by the sale of investments.
Gearing levels may change from time to time in accordance with the Manager's
and the Board's assessment of risk and reward. As a consequence, any reduction
in the value of the Company's investments may lead to a correspondingly greater
percentage reduction in its net asset value (which is likely to affect the
Company's share price adversely). Any reduction in the number of shares in
issue (for example, as a result of buy backs) will, in the absence of a
corresponding reduction in borrowings, result in an increase in the Company's
gearing.
Derivatives
The Company may enter into derivative transactions for efficient portfolio
management. Derivative instruments can be highly volatile and expose investors
to a high risk of loss. There is a risk that the return on a derivative does
not exactly correlate to the returns on the underlying investment, obligation
or market sector being hedged against. If there is an imperfect correlation,
the Company may be exposed to greater loss than if the derivative had not been
entered into.
Dividends
The ability of the Company to pay dividends quarterly is dependent on the level
and timing of receipt of income on its investments. The Manager and the Board
regularly review revenue forecasts.
Regulatory and Tax Related
The Company is subject to various laws and regulations and in particular by
virtue of being a Company registered under the Companies (Jersey) Law 1991, its
status as a collective investment fund registered under the Collective
Investment Funds (Jersey) Law 1988, its listing on the Official List of the UK
Listing Authority and its admission to trading on the London Stock Exchange. A
serious breach of regulatory rules may lead to suspension from the Official
List and from trading on the London Stock Exchange, a fine or a qualified Audit
Report.
Any change in the Company's tax status, or in taxation legislation or practice
in either Jersey or the United Kingdom or any jurisdiction in which the Company
owns assets, or in the Company's tax treatment, may affect the value of the
investments held by the Company or the Company's ability successfully to pursue
and achieve its investment objectives, or alter the after-tax returns to
shareholders. Failure by the Company to maintain its non-UK tax resident status
may subject the Company to additional taxes which may materially adversely
affect the Company's business, the results of its operations and the value of
the shares. Recently enacted US tax legislation may in the future impose a
withholding tax on certain payments received by the Company and on payments to
shareholders. The EU Directive on Alternative Investment Fund Managers may
impair the ability of the Manager to manage the investments of the Company,
which may materially adversely affect the Company's ability to implement its
investment strategy and achieve its investment objective.
The Manager reviews the level of compliance with all relevant regulatory
requirements and reports to the Board on a regular basis.
Resources: Reliance on Third Party Providers
The Company is an investment company which outsources its management, company
secretarial and administrative functions. It has no employees and the Directors
are all non-executive. The Company is therefore reliant on other parties for
the performance of its functions and the quality of its operations. Through the
contractual arrangements in place the full range of services required are
available to the Company. The most significant contracts are with the Manager,
for the management of the Company's portfolio and certain administrative
functions, and with R&H Fund Services (Jersey) Limited for the provision of
company secretarial and administrative services. The Company also has
contractual arrangements with third parties to act as registrars and, through
the Manager, custodian.
Failure by any service provider to carry out its obligations in accordance with
the terms of its appointment could have a materially detrimental impact on the
effective operation of the Company and on the ability of the Company to pursue
its investment policy successfully. Such failure could also expose the Company
to reputational risk. In addition, the Manager may be exposed to the risk that
litigation, misconduct, operational failures, negative publicity and press
speculation, whether valid or not, will harm its reputation. Any damage to the
reputation of the Manager could result in potential counterparties and third
parties being unwilling to deal with the Manager and by extension the Company.
The Board seeks to manage these risks in a number of ways. In particular the
Board reviews the performance of the Manager formally at every board meeting
and otherwise as appropriate. The day-to-day management of the portfolio is the
responsibility of the portfolio managers to whom the Board has given wide
discretion to operate within set guidelines. Any proposed variation outside
those guidelines is referred to the Board and the guidelines themselves are
reviewed at every board meeting. The risk that one of the portfolio managers
might be incapacitated or otherwise unavailable is mitigated by the fact that
they work within and are supported by the wider Invesco Fixed Interest team.
The Board also has power to replace the Manager and reviews the management
contracts formally once a year.
The Manager regularly reviews, against agreed service standards, the
performance of all third party providers through formal and informal meetings.
The results of the Manager's reviews are reported to and reviewed by the Board.
The contractual arrangements which govern relationships with third party
providers, including the registrars, the custodian, and the corporate broker
are also reviewed by the Board on an annual basis.
The Ordinary Shares
The stated capital of the Company consists solely of ordinary shares of no par
value. The market price of, and the income derived from, the Company's shares
can fluctuate and may go down as well as up. The market value may not always
reflect the NAV per share. The market price of a share may therefore trade at a
discount to its NAV. As at 31 December 2012, the shares of the Company traded
at a discount of 4%. Past performance of the Company is not necessarily
indicative of future performance.
The market value of the shares will be affected by a number of factors,
including their dividend yield from time to time, prevailing interest rates and
supply and demand for those shares, along with wider economic factors and
changes in law, including tax law, and political factors. The market value of a
share may therefore vary considerably from its underlying NAV. There can be no
guarantee that any appreciation in the value of the Company's investments will
occur and investors may not get back the full value of their investment.
Although the shares are listed on the Official List and admitted to trading on
the London Stock Exchange's main market for listed securities, it is possible
that there may not be a liquid market in the shares and shareholders may have
difficulty selling them.
.
Statement of Directors' Responsibilities
in respect of the preparation of financial statements
The Directors are responsible for preparing the annual financial report in
accordance with applicable laws and regulations.
Company law requires the Directors to prepare financial statements for each
financial period. Under that law the Directors have elected to prepare the
financial statements in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union. The financial statements
are required by law to give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that period.
International Accounting Standard 1 requires that financial statements present
fairly for each financial year the Company's financial position, financial
performance and cash flows. This requires the faithful representation of the
effects of transactions, other events and conditions in accordance with the
definitions and recognition criteria for assets, liabilities, income and
expenses set out in the International Accounting Standards Board's `Framework
for the preparation and presentation of financial statements'. In virtually all
circumstances, a fair presentation will be achieved by compliance with all
applicable IFRSs.
In preparing these financial statements, the Directors are required to:
• properly select and apply accounting policies and then apply them
consistently;
• present information, including accounting policies, in a manner that provides
relevant, reliable, comparable and understandable information;
• provide additional disclosures when compliance with specific requirements in
IFRSs are insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the entity's financial position
and financial performance; and
• make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and which enable them to ensure that the accounts comply with the
Companies (Jersey) Law 1991. They are also responsible for safeguarding the
assets of the Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Directors' Report (including a Business Review) and a Corporate
Governance Statement that comply with that law and those regulations.
The Directors of the Company, each confirm to the best of their knowledge that:
• the financial statements, which have been prepared in accordance with
applicable accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company;
• this annual financial report includes a fair review of the development and
performance of the business and the position of the Company, together with a
description of the principal risks and uncertainties that it faces; and
• the annual report and accounts, taken as a whole, are fair, balanced and
understandable and provide the information necessary for shareholders to assess
the Company's performance, business model and strategy.
Clive Nicholson
Chairman
Signed on behalf of the Board of Directors
28 March 2013
.
Statement of Comprehensive Income
For the period 19 December 2011 to 31 December 2012
Trading commenced on 2 April 2012
Revenue Capital Total
Notes £'000 £'000 £'000
Profit on investments held at fair value 11 - 8,370 8,370
Exchange differences - 123 123
Profit on derivative instruments
- currency hedges - 1,088 1,088
Income 4 6,422 - 6,422
Investment management fees 5 (433) (233) (666)
Other expenses 6 (286) - (286)
Profit before finance costs and taxation 5,703 9,348 15,051
Finance costs 7 (21) (12) (33)
Profit before tax 5,682 9,336 15,018
Taxation 8 (42) - (42)
Profit after tax 5,640 9,336 14,976
Return per ordinary share 9 7.8p 12.8p 20.6p
The total column of this statement represents the Company's statement of
comprehensive income, prepared in accordance with International Financial
Reporting Standards. The profit after tax is the total comprehensive income.
The supplementary revenue and capital columns are both prepared in accordance
with the Statement of Recommended Practice issued by the Association of
Investment Companies. All items in the above statement derive from continuing
operations. No operations were discontinued in the period.
.
Statement of Changes in Equity
For the period 19 December 2011 to 31 December 2012
Trading commenced on 2 April 2012
Stated Capital Revenue
Capital Reserve Reserve Total
Notes £'000 £'000 £'000 £'000
Issue of new shares 15 113,930 - - 113,930
Issue costs 15 (520) - - (520)
Total comprehensive income for the period - 9,336 5,640 14,976
Dividends paid 10 - - (3,711) (3,711)
At 31 December 2012 113,410 9,336 1,929 124,675
The accompanying notes are an integral part of these financial statements.
.
Balance Sheet
At 31 December 2012
Notes £'000
Non-current assets
Investments held at fair value through profit or loss 11 117,527
Current assets
Other receivables 12 2,407
Cash and cash equivalents 5,094
7,501
Current liabilities
Other payables 13 (343)
Derivative financial instruments - unrealised loss 14 (10)
(353)
Net current assets 7,148
Net assets 124,675
Capital and reserves
Stated capital 15 113,410
Capital reserve 16 9,336
Revenue reserve 16 1,929
Shareholders' funds 124,675
Net asset value per ordinary share 17 171.29p
These financial statements were approved and authorised for issue by the Board
of Directors on 28 March 2013.
Clive Nicholson
Chairman
Signed on behalf of the Board of Directors
The accompanying notes are an integral part of these financial statements.
.
Statement of Cashflows
For the period 19 December 2011 to 31 December 2012
Trading commenced on 2 April 2012
£'000
Cash flow from operating activities
Profit before tax 15,018
Taxation (42)
Adjustment for:
Purchases of investments (18,171)
Sales of investments 18,542
371
Profit on investments (8,370)
Exchange differences (123)
Derivative instruments - currency hedges 10
Finance costs 33
Operating cash flows before movements in working capital 6,897
Other receivables at period end - note 12 (2,407)
Accrued interest received from City Merchants High Yield Trust plc - 2,823
note 15
Decrease in receivables 416
Increase in payables 336
Net cash flows from operating activities 7,649
Cash flow from financing activities
Costs incurred in formation of new company (520)
Cash received from City Merchants High Yield Trust plc - note 15 1,579
Finance cost paid (26)
Equity dividends paid - note 10 (3,711)
Net cash flows from financing activities (2,678)
Net increase in cash and cash equivalents 4,971
Exchange differences 123
Cash and cash equivalents at the end of the period 5,094
The accompanying notes are an integral part of these financial statements.
.
Notes to the Financial Statements
For the period 19 December 2011 to 31 December 2012
1. Principal Activity
The Company is a closed-end investment company incorporated in Jersey and
operates under the Companies (Jersey) Law 1991. The principal activity of the
Company is investment in a diversified portfolio of high-yielding
fixed-interest securities as set out in the Company's Investment Objective and
Policy.
2. Principal Accounting Policies
The principal accounting policies adopted in the preparation of these financial
statements are set out below.
(a) Basis of Preparation
(i) Accounting Standards Applied
The financial statements have been prepared on an historical cost basis, except
for the measurement at fair value of investments and derivatives, and in
accordance with the applicable International Financial Reporting Standards
(IFRS) and interpretations issued by the International Financial Reporting
Interpretations Committee as adopted by the European Union. The standards are
those endorsed by the European Union and effective at the date the financial
statements were approved by the Board.
Where presentational guidance set out in the Statement of Recommended Practice
(SORP) `Financial Statements of Investment Trust Companies and Venture Capital
Trusts', issued by the Association of Investment Companies, is consistent with
the requirements of IFRS, the Directors have sought to prepare the financial
statements on a basis compliant with the recommendations of the SORP. The
supplementary information which analyses the statement of comprehensive income
between items of a revenue and a capital nature is presented in accordance with
this.
(ii) Adoption of New and Revised Standards
New and revised standards and interpretations that became effective during the
period had no significant impact on the amounts reported in these financial
statements but may impact accounting for future transactions and arrangements.
At the date of authorising these financial statements, the following standards
and interpretations which have not been applied in these financial statements
were in issue but not yet effective (and in some cases had not yet been adopted
by the EU).
• IFRS 9: Financial Instruments (effective for accounting periods starting on
or after 1 January 2015).
• IFRS 10: Consolidated Financial Statements (effective for accounting periods
starting on or after 1 January 2013).
• IFRS 12: Disclosure of Interests in Other Entities (effective for accounting
periods starting on or after 1 January 2013).
• IFRS 13: Fair Value Measurement (effective for accounting periods starting on
or after 1 January 2013).
• IFRS 7 Financial Instruments: Disclosures - Amendments enhancing disclosures
for offsetting financial assets and financial liabilities (effective 1 January
2013).
• IAS 32 Financial Instruments: Presentation - Amendments to application
guidance on the offsetting of financial assets and financial liabilities
(effective 1 January 2014).
• Mandatory Effective Date and Transition Disclosures - Amendments to IFRS 9
and IFRS 7 (effective 1 January 2015).
• Amendments to IFRS10, IFRS 12 and IAS 27 (October 2012) - Investment Entities
(effective for accounting periods starting on or after 1 January 2014).
The Directors do not expect the adoption of above standards and interpretations
(or any other standards and interpretations which are in issue but not
effective) will have a material impact on the financial statements of the
Company in future periods.
(iii) Critical Accounting Estimates and Judgements
The preparation of the financial statements requires the Company to make
estimations where uncertainty exists. It also requires the Company to exercise
judgement in the process of applying the accounting policies. The critical
accounting estimates and areas involving a higher degree of judgement or
complexity comprise the fair value of derivatives and other financial
instruments.
The Directors use their judgement in selecting an appropriate valuation
technique for financial instruments not quoted on an active market. Valuation
techniques commonly used by market practitioners are applied. For derivative
financial instruments, assumptions are made based on quoted market rates
adjusted for specific features of the instrument. Other financial instruments
are valued using a discounted cash flow analysis based on assumptions
supported, where possible, by observable market prices or rated.
Where there is no active market, illiquid/unlisted investments are valued by
the Directors at fair value based on recommendations from Invesco's Pricing
Committee, which in turn is guided by the International Private Equity and
Venture Capital Association Guidelines, using valuation techniques such as
earnings multiples, recent arm's length transactions and net assets.
(b) Foreign Currency
(i) Functional and Presentation Currency
The financial statements are presented in sterling, which is the Company's
functional and presentation currency and the currency in which the Company's
stated capital and expenses are denominated, as well as certain of its income,
assets and liabilities.
(ii) Transactions and Balances
Transactions in foreign currency, whether of a revenue or capital nature, are
translated to sterling at the rate of exchange ruling on the date of such
transactions. Foreign currency assets and liabilities are translated to
sterling at the rates of exchange ruling at the balance sheet date. All gains
and losses, whether realised or unrealised, are recognised in the statement of
comprehensive income and are taken to capital reserve or revenue reserve,
depending on whether the gain or loss is capital or revenue in nature.
(c) Financial Instruments
(i) Recognition of Financial Assets and Financial Liabilities
The Company recognises financial assets and financial liabilities when the
Company becomes a party to the contractual provisions of the instrument. The
Company will offset financial assets and financial liabilities if the Company
has a legally enforceable right to set off the recognised amounts and interests
and intends to settle on a net basis.
(ii) Derecognition of Financial Assets
The Company derecognises a financial asset when the contractual rights to the
cash flows from the asset expire, or it transfers the right to receive the
contractual cash flows on the financial asset in a transaction in which
substantially all the risks and rewards of ownership of the financial asset are
transferred. Any interest in the transferred financial asset that is created or
retained by the Company is recognised as an asset.
(iii) Derecognition of Financial Liabilities
The Company derecognises financial liabilities when its obligations are
discharged, cancelled or expired.
(iv) Trade Date Accounting
Purchases and sales of financial assets are recognised on trade date, being the
date on which the Company commits to purchase or sell the assets.
(v) Classification of Financial Assets and Financial Liabilities
Financial Assets
The Company's investments are classified as held at fair value through profit
or loss as the investments are managed and their performance evaluated on a
fair value basis in accordance with the Company's documented investment
strategy and this is also the basis on which information about investments is
provided internally to the Board.
Financial assets held at fair value through profit or loss are initially
recognised at fair value, which is taken to be their cost, with transaction
costs expensed in the statement of comprehensive income, and are subsequently
valued at fair value.
For investments that are actively traded in organised financial markets, fair
value is determined by reference to stock exchange quoted bid prices at the
balance sheet date. For investments that are not actively traded or where
active stock exchange quoted bid prices are not available, fair value is
determined by reference to a variety of valuation techniques including broker
quotes and price modelling. Where there is no active market, investments are
valued by the Directors at fair value based on recommendations from Invesco's
Pricing Committee using valuation techniques such as earnings multiples, recent
arm's length transactions and net assets.
Financial Liabilities
Financial liabilities, including borrowings, are initially measured at fair
value, net of transaction costs and are subsequently measured at amortised cost
using the effective interest method.
(d) Hedging and Derivatives
Forward currency contracts entered into for hedging purposes are valued at the
appropriate forward exchange rate ruling at the balance sheet date.
Futures contracts entered into for hedging purposes and any profits and losses
on the closure or revaluation of positions are recognised in the statement of
comprehensive income and taken to capital reserves.
Derivative instruments are valued at fair value in the balance sheet.
(e) Cash and Cash Equivalents
Cash and cash equivalents comprise cash at bank and short-term deposits with an
original maturity date of three months or less.
(f) Revenue Recognition
All income is recognised in the statement of comprehensive income. Interest
income arising from fixed income securities and cash is recognised using the
effective interest method. Dividend income arises from equity investments held
and is recognised on the date investments are marked `ex-dividend'. Deposit
interest and underwriting commission are taken into account on an accruals
basis.
(g) Expenses and Finance Costs
All expenses are accounted for on an accruals basis and are recognised in the
statement of comprehensive income. Investment management fees and finance costs
are allocated 35% to capital and 65% to revenue in accordance with the Board's
expected long-term split of returns, in the form of capital gains and income
respectively, from the investment portfolio. Except for custodian dealing
costs, all other expenses are charged through revenue. Expenses in relation to
the set up of the Company are charged to stated capital.
(h) Tax
Overseas interest and dividends are shown gross of withholding tax and the
corresponding irrecoverable tax is shown as a charge in the statement of
comprehensive income.
3. Segmental Reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business of investing in debt, and, to a significantly lesser extent
equity securities, and therefore no segmental reporting is provided.
4. Income
19 December 2011
to
31 December 2012
£'000
Income from investments
UK dividends 453
UK investment income - interest 2,286
Overseas investment income - interest 3,669
Overseas dividends 2
6,410
Other income
Deposit interest 12
Total income 6,422
5. Investment Management Fee
19 December 2011 to
31 December 2012
Revenue Capital Total
£'000 £'000 £'000
Investment management fee 433 233 666
Details of the investment management agreement are disclosed in the Report of
the Directors. At the period end the management fee accrued was £234,000.
6. Other Expenses
19 December 2011
to
31 December 2012
Revenue
£'000
General expenses (i) 179
Directors' fees (ii) 81
Auditor's remuneration: 26
-for the audit of the financial statements
286
(i) General expenses include £37,500 due to R&H Fund Services (Jersey) who act
as Administrator and Company Secretary to the Company under an Agreement dated
19 December 2011. This agreement is terminable at any time by either party
giving no less than three months' notice. The fee is payable quarterly in
arrears based on the initial rate of £37,500 per annum. The fee is revised with
effect from 1 January each year, by the application of a formula based on the
Retail Price Index for the month of March in the relevant year.
An additional £5,000 was also paid to R&H Fund Services (Jersey) in respect of
set up costs of the Company and charged to stated capital.
General expenses also include an administration fee due to Invesco Asset
Management Limited of £17,000 for the period which is payable quarterly in
arrears based on the initial rate of £22,500 per annum. The fee is revised with
effect from 1 July each year by the application of a formula based on the
Retail Price Index for the month of May in the relevant year.
(ii) The maximum Directors' fees authorised by the Articles of Association are
£150,000 per annum.
An amount of £26,875, equivalent to one quarter of the annual directors' fees,
has been charged to stated capital as part of initial issue costs in connection
with set up of the Company.
(iii) There were no non-audit services in the period.
7. Finance Costs
19 December 2011 to
31 December 2012
Revenue Capital Total
£'000 £'000 £'000
Commitment fees due on loan facility 21 12 33
8. Taxation
19 December 2011 to
31 December 2012
£'000
Overseas taxation 42
For the period 19 December 2011 to 31 December 2012, the Company is subject to
Jersey income tax at the rate of 0%. The overseas tax charge consists of
irrecoverable withholding tax.
9. Return per Ordinary Share
The basic revenue, capital and total return per ordinary share is based on each
of the profit after tax and on 72,786,327 ordinary shares, being the weighted
average number of ordinary shares in issue throughout the period.
10. Dividends on Ordinary Shares
19 December
2011 to
31 December
2012
Pence £'000
Dividends paid and recognised in the period:
First interim 2.6 1,891
Second interim 2.5 1,820
5.1 3,711
Special interim dividend paid and recognised by
City Merchants High Yield Trust plc 2.4 1,747
7.5 5,458
Set out below are the dividends that have been declared in respect of the
financial period 19 December 2011 to 31 December 2012:
19 December 2011
to
31 December 2012
Pence £'000
First interim paid 2.6 1,891
Second interim paid 2.5 1,820
Third interim paid 28 February 2013 2.5 1,820
7.6 5,531
Special interim dividend paid by City Merchants High Yield 2.4 1,747
Trust plc
10.0 7,278
11. Investments Held at Fair Value Through Profit or Loss
(a) Analysis of investment profits
2012
£'000
Investments acquired from City Merchants High Yield Trust plc (note 109,528
15)
Movements in the period:
Purchases at cost 18,171
Sales - proceeds (18,542)
Sales - net realised loss on sales (39)
Movement in investment holding profit 8,409
Closing valuation 117,527
Closing book cost 109,118
Closing investment holding profit 8,409
Closing valuation 117,527
Realised loss in the period (39)
Movement in investment holding profit in the period 8,409
Total profit in the period 8,370
(b) Transaction costs
There are no transaction costs on purchases and on sales of investments during
the period.
(c) Registration of investments
The investments of the Company are registered in the name of the Company or in
the name of nominees and held to the account of the Company.
12. Other Receivables
2012
£'000
Prepayments and accrued income 2,407
2,407
13. Other Payables
2012
£'000
Accruals 343
343
The Company has a 364 day £20 million multi-currency revolving credit facility
with Bank of New York Mellon which is renewable on 10 May 2013. Interest
payable is based on the interbank offered rate for the currency drawn down. At
31 December 2012 the Company had no drawdowns.
14. Derivative Financial Instruments
Derivative financial instruments comprise forward currency contracts.
2012
£'000
Forward currency contracts - unrealised loss- 10
10
15. Stated Capital
2012
£'000
72,786,327 allotted ordinary shares of no par value- 113,410
At launch, 72,786,327 ordinary shares of no par value in City Merchants High
Yield Trust Limited were issued on a 1:1 basis to the shareholders of City
Merchants High Yield Trust plc, in lieu of their investment in that company.
The net consideration for these shares was as follows:
2012
£'000
Investments 109,528
Cash 1,579
Accrued income 2,823
113,930
Issue costs (520)
113,410
16. Reserves
The capital reserve includes investment holding gains and losses, being the
difference between cost and market value at the balance sheet date, as well as
realised profits and losses on disposals of investments. Both the capital and
revenue reserves are distributable.
17. Net Asset Value per Ordinary Share
The net asset value per ordinary share and the net assets attributable at the
period end were as follows:
Net Asset Net Assets
Value per Attributable
Ordinary
Share
2012 2012
Pence £'000
Ordinary shares 171.29 124,675
Net asset value per ordinary share is based on net assets at the period end and
on 72,786,327 ordinary shares, being the number of ordinary shares in issue at
the period end.
18. Financial Instruments
The Company's financial instruments comprise its investment portfolio, cash,
borrowings, other receivables and other payables that arise directly from its
operations such as sales and purchases awaiting settlement, derivatives and
accrued income. The accounting policies in note 2 include criteria for the
recognition and the basis of measurement applied for financial instruments.
Note 2 also includes the basis on which income and expenses arising from
financial assets and liabilities are recognised and measured.
The principal risks that the Company faces in its portfolio management
activities are set out below:
Market risk - arising from fluctuations in the fair value or future cash flows
of a financial instrument because of changes in market prices. Market risk
comprises three types of risk: currency risk, interest rate risk and other
price risk:
Currency risk - arising from fluctuations in the fair value or future cash
flows of a financial instrument because of changes in foreign exchange rates;
Interest rate risk-arising from fluctuations in the fair value or future cash
flows of a financial instrument because of changes in market interest rates;
and
Other price risk - arising from fluctuations in the fair value or future cash
flows of a financial instrument for reasons other than changes in foreign
exchange rates or market interest rates.
Liquidity risk - arising from any difficulty in meeting obligations associated
with financial liabilities.
Credit risk - arising from financial loss for a company where the other party
to a financial instrument fails to discharge an obligation.
Risk Management Policies and Procedures
The Directors have delegated to the Manager the management of the day-to-day
investment activities, borrowings and hedging of the Company as more fully
described in the Report of the Directors.
As an investment company, investments include, but are not restricted to loan
stocks, corporate bonds, government stocks, preference shares and equities held
for the long-term so as to comply with its Investment Policy (incorporating the
Company's investment objective). In pursuing its investment objective, the
Company is exposed to a variety of risks that could result in either a
reduction in the Company's net assets or a reduction of the profits available
for dividends. The risks applicable to the Company and the policies the Company
uses to manage these risks for the period under review follow.
Market Risk
As described in the Report of the Directors, high-yield fixed-interest
securities are subject to a variety of risks. Many of the Company's investments
are non-investment grade securities and adverse changes in the financial
position of an issuer or in the general economy may effect both the principal
and the interest. Gearing by using the Company's borrowing facility can enhance
returns, however, this will also increase the Company's exposure to market risk
and volatility.
The portfolio managers assess the exposure to market risk when making each
investment decision, and monitor the overall level of market risk on the whole
of the portfolio on an ongoing basis. Risk management is an integral part of
the investment management process. The portfolio managers control risk by
ensuring that the Company's investment portfolio is appropriately diversified.
In-depth and continual analysis of market and stock fundamentals give the
portfolio managers the best possible understanding of the risks associated with
a particular stock.
(a) Currency Risk
The Company's assets, liabilities and income which are denominated in
currencies other than sterling and movements in exchange rates will affect the
sterling value of those items.
Management of the Currency Risk
The Board meets at least quarterly to assess risk and review investment
performance. The portfolio managers monitor the Company's exposure to foreign
currencies on a daily basis and report to the Board. Drawings in foreign
currencies on the borrowing facility can be used to limit the Company's
exposure to anticipated future changes in exchange rates and can also be used
to achieve the portfolio characteristics that assist the Company in meeting its
investment objective. The Company can also use forward currency contracts to
limit the Company's exposure to anticipated future changes in exchange rates.
All facility drawings and derivatives contracts are limited to currencies and
amounts commensurate with asset exposure to those currencies.
Income denominated in foreign currencies is converted to sterling on receipt.
The Company does not use financial instruments to mitigate the currency
exposure in the period between the time that income is included in the
financial statements and its receipt.
Currency Exposure
The fair values of the Company's monetary items that have foreign currency
exposure at 31 December are shown in the table below. Where the Company's
investments (which are not monetary items) are priced in a foreign currency,
they have been included separately in the analysis to show the overall level of
exposure.
31 December 2012 US Canadian Swiss
Euro Dollar Dollar Franc
£'000 £'000 £'000 £'000
Investments at fair value through profit or
loss that are monetary items (fixed-interest) 40,395 15,084 - -
Cash at bank 1,009 522 - -
Other receivables (due from brokers, dividends
receivable and accrued income) 872 225 - -
Forward currency contracts (36,097) - - -
Foreign currency exposure on net monetary 6,179 15,831 - -
items
Investments at fair value through profit or - 3,843 112 518
loss that are equities/warrants
Total net foreign currency exposure 6,179 19,674 112 518
The above may not be representative of the exposure to risk during the period
reported because the levels of monetary foreign currency exposure may change
significantly throughout the period.
Currency Sensitivity
The following table illustrate the sensitivity of the profit after taxation for
the period with respect to the Company's monetary financial assets and
liabilities and each of the exchange rates for £ to Euro, US dollar, Canadian
dollar and Swiss franc based on the following:
2012
£/Euro ±1.4%
£/US dollar ±1.5%
£/Canadian dollar ±1.0%
£/Swiss franc ±1.4%
The above percentages have been determined based on the market volatility in
exchange rates in the period. The sensitivity analysis is based on the
Company's monetary foreign currency financial instruments held at the balance
sheet date and takes account of any forward foreign exchange contracts that
offset the effects of changes in currency exchange rates. The effect of the
strengthening or weakening of sterling against currencies to which the Company
is exposed is calculated by reference to the volatility of exchange rates
during the period using the standard deviation of currency fluctuations against
the mean.
If sterling had strengthened by the changes in exchange rates shown above, this
would have had the following effect:
19 December 2011 to 31
December 2012
US Canadian Swiss
Euro Dollar Dollar Franc
£'000 £'000 £'000 £'000
Effect on income statement
Revenue loss (32) (13) - -
Capital loss (78) (301) (1) (7)
Effect on net asset value (110) (314) (1) (7)
If sterling had weakened by the changes in exchange rates shown above this
would have an equal and opposite effect.
In the opinion of the Directors, the above sensitivity analysis is not
representative of the period as a whole, since the level of exposure changes
frequently as part of the currency risk management process of the Company.
(b) Interest Rate Risk
Interest rate movements may affect:
- the fair value of the investments in fixed-interest rate securities;
- the level of income receivable on cash deposits; and
- the interest payable on variable rate borrowings.
Management of Interest Rate Risk
The possible effects on fair value and cash flows that could arise as a result
of changes in interest rates are taken into account as part of the portfolio
management and borrowings processes of the Manager. The Board reviews on a
regular basis the investment portfolio and borrowings. This encompasses the
valuation of fixed-interest and floating rate securities and gearing levels.
When the Company has cash balances, they are held in variable rate bank
accounts yielding rates of interest dependant on the base rate of the
custodian. The Company has a £20 million multi-currency facility with the Bank
of New York Mellon which is renewable on 10 May 2013. This facility allows the
Company to draw down amounts in sterling, euros or US dollars to maximum
sterling equivalent of £20 million. Drawings under this facility are subject to
the restriction that the Company's total financial indebtedness must not exceed
30% of total assets and that the assets must be in excess of £50 million. At
the period end there were no drawings. The Company uses the facility when
required at levels approved and monitored by the Board.
Interest Rate Exposure
At 31 December the exposure of financial assets and financial liabilities to
interest rate risk is shown by reference to:
- floating interest rates (giving cash flow interest rate risk) - when the
interest rate is due to be re-set;
- fixed interest rates (giving fair value interest rate risk) - when the
financial instrument is due for repayment.
2012
Within More
one than
year one Total
£'000 year £'000
£'000
Exposure to floating interest rates:
Investments at fair value through profit or loss - 35,263 35,263
Cash and cash equivalents 5,094 - 5,094
5,094 35,263 40,357
Exposure to fixed-interest rates:
Investments at fair value through profit or loss 3 69,587 69,590
Net exposure to interest rates 5,097 104,850 109,947
The nominal interest rates on the investments at fair value through profit or
loss are shown in the portfolio statement. The weighted average effective
interest rate on these investments is 6.9%. The weighted average effective
interest rate on cash and cash equivalents is 0.25%.
Interest Rate Sensitivity
The following table illustrates the sensitivity of the profit after taxation
for the year to a 1% increase in interest rates in regard to the Company's
monetary financial assets and financial liabilities. As future changes cannot
be estimated with any degree of certainty, the sensitivity analysis is based on
the Company's monetary financial instruments held at the balance sheet date,
with all other variables held constant.
19 December
2011 to
31 December
2012
£'000
Effect on income statement
Revenue profit 51
Capital loss (4,393)
Effect on net asset value (4,342)
If interest rates had decreased by 1%, this would have had an equal and
opposite effect.
The above exposure and sensitivity analysis are not representative of the
period as a whole, since the level of exposure changes frequently as borrowings
are drawn down and repaid throughout the period.
(c) Other Price Risk
Other price risks (i.e. changes in market prices other than those arising from
interest rate risk or currency risk) may affect the value of the investment
portfolio. It is the business of the portfolio managers to manage the portfolio
and borrowings to achieve the best returns.
Management of Other Price Risk
The Directors manage the market price risks inherent in the investment
portfolio by meeting regularly to monitor on a formal basis compliance with the
Company's stated investment policy and objective and to review investment
performance.
The Company's portfolio is the result of the portfolio managers investment
process and as a result is not correlated with the markets in which the Company
invests. The value of the portfolio will not move in line with the markets but
will move as a result of the performance of the underlying portfolio. The
Company can hedge all or part of its investment portfolio denominated in
foreign currency by using borrowings under its revolving credit facility in the
same currency. It can also hold derivative positions in options and futures to
hedge movements in the stocks to which the portfolio has an exposure.
The Company's exposure to other changes in market prices at 31 December on its
quoted equity investments and fixed interest investments was as follows:
2012
£'000
Fixed asset investments at fair value through profit or -Bonds 104,853
loss
-Equity 12,674
117,527
Concentration of Exposure to Other Price Risks
The Company's investment portfolio is not concentrated to any single country of
domicile, however, it is recognised that an investment's country of domicile or
listing does not necessarily equate to its exposure to the economic conditions
in that country.
Other Price Risk Sensitivity
At the period end, the Company held equity investments of £12,674,000. The
effect of a 10% increase or decrease in the fair values (including equity
exposure through derivatives) on the profit after taxation for the period is £
1,267,000. This level of change is considered to be reasonably possible based
on the observation of current market conditions. The sensitivity analysis is
based on the Company's equities and equity exposure through derivatives at the
balance sheet date with all other variables held constant.
Liquidity Risk
This is the risk the Company encounters when realising assets or raising
finance to meet financial commitments. A lack of liquidity in the portfolio may
make it difficult for the Company to realise assets at or near their purported
value in the event of a forced sale.
Management of Liquidity Risk
The portfolio managers, as part of their ongoing responsibilities, ascertain
the Company's cash requirements by reviewing future cash flows from purchases
and sales of investments, interest and dividend receipts, expenses and dividend
payment, and available financing. The portfolio managers review the draw downs
on the borrowing facility on a daily basis. If the facility were fully utilised
the portfolio managers could potentially realise the more liquid assets in the
portfolio, taking into account the effect of this on performance as well as the
objectives of the Company.
Liquidity Risk Exposure
The contractual maturities of the financial liabilities at the balance sheet,
based on the earliest date on which payment can be required follow:
Three
months
or less
£'000
Forward currency contracts 10
Other payables 343
353
Credit Risk
Credit risk encompasses the failure by counterparties to deliver securities
which the Company has paid for, or to pay for securities which the Company has
delivered. This risk is mitigated by using only approved counterparties. The
portfolio may be adversely affected if the Company's custodian suffers
insolvency or other financial difficulties. The Board reviews the custodian's
annual control report and the Manager's management of the relationship with the
custodian.
Management of and Exposure to Credit Risk
The Company's principal credit risk is the risk of default of the
non-investment grade debt. Where the portfolio managers make an investment in a
bond, corporate or otherwise, the credit rating of the issuer is taken into
account to minimise the risk to the Company of default. Investments in bonds
are across a variety of industrial sectors and geographical markets to avoid
concentration of credit risk. Transactions involving derivatives are entered
into only with banks whose credit rating are taken into account to minimise
default risk. Credit risk for transactions involving equity investments is
minimised as the Company only uses approved counterparties.
Cash balances are limited to a maximum of 4% of the Company's net asset value
with any one depositary, with only approved depositaries being used. At the
balance sheet date the Company had £3.4 million held in Short-Term Investments
Company (Global Series) plc, a triple-A rated money market fund and £1.7
million held at the custodian.
Fair Values of Financial Assets and Financial Liabilities
The financial assets and financial liabilities are either carried in the
balance sheet at their fair value (investments and derivatives), or the balance
sheet amount is a reasonable approximation of fair value (due from brokers,
dividends receivable, accrued income, due to brokers, accruals and cash).
Classification Under Fair Value Hierarchy
The table that follows sets out the fair value of the financial instruments of
the Company into the three levels defined in IFRS 7 "Financial Instruments:
Disclosures".
Level 1 - valued using quoted prices in active markets for identical assets.
Level 2 - valued by reference to valuation techniques using observable inputs
other than quoted prices within Level 1.
Level 3 - valued by reference to valuation techniques using inputs that are not
based on observable market data.
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the fair value measurement of each
relevant asset/liability.
2012
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Financial assets designated at fair value
through profit or loss:
Quoted securities
Debt securities - 104,800 - 104,800
Equities 12,560 - - 12,560
Unquoted securities
Debt securities - - 53 53
Equities - - 114 114
Total for financial assets 12,560 104,800 167 117,527
Financial liabilities
Forward currency contracts (10) - - (10)
Total for financial liabilities (10) - - (10)
The valuation techniques used by the Company are explained in the accounting
policies note. There were no transfers in the period between any of the levels.
Normally investment company investments would be valued using stock market
active prices, with investments disclosed as Level 1 and this is the case for
the quoted equity investments that the Company holds. However, a majority of
the investments are non-equity investments that are priced using Bloomberg,
which in turn is based on broker quotes or pricing models. These investments
are disclosed as Level 2 - recognising that the fair values of these
investments are not as visible as quoted equity investments and their higher
inherent pricing risk. However, this does not mean that the fair values shown
in the portfolio valuation are not achievable at point of sale.
A reconciliation of the fair value of Level 3 is set out below.
2012
£'000
Transfer of Level 3 investments from City Merchants High Yield Trust 442
plc
Holding losses in the period (275)
Closing fair value of Level 3 167
Level 3 valuations comprise investments held at Directors' valuation as
disclosed in the accounting policies note.
Capital Management
The Company's capital, or equity, is represented by its net assets which are
managed to achieve the Company's investment objective.
The main risks to the Company's investments are shown in the Report of the
Directors under the `Principles Risks and Uncertainties' section. These also
explain that the Company is able to gear and that gearing will amplify the
effect on equity of changes in the value of the portfolio.
The Board can also manage the capital structure directly since it has taken the
powers, which it is seeking to renew, to issue and buy-back shares and it also
determines dividend payments.
The Company is subject to externally imposed capital requirements with respect
to the availability of the borrowing facility, by the terms imposed by the
custodian. The Board regularly monitors, and has complied with, the externally
imposed capital requirements throughout the period.
Total equity at 31 December 2012 was £124,675,000.
19. Contingencies, Guarantees and Financial Commitments
There were no contingencies, guarantees or financial commitments outstanding at
the balance sheet date.
20. Related Party Transactions and Transactions with the Manager
Under International Financial Reporting Standards, the Company has identified
no related parties and there have been no related party transactions during the
year. Invesco Asset Management Limited (IAML), a wholly owned subsidiary of
Invesco Limited, acts as Manager to the Company. Details of the investment
management agreement are disclosed in the Report of the Directors and
management fees payable to IAML are shown in note 5.
.
This annual financial report announcement is not the Company's statutory
accounts. The statutory accounts for the period ended 31 December 2012 have
been audited and approved but are not yet filed. They received an audit report
which is unqualified and does not include a reference to any matters to which
the auditors drew attention by way of emphasis without qualifying the report.
The audited annual financial report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
Registered Office, Ordnance House, 31 Pier Road, St.Helier, Jersey, JE4 8PW or
the Manager's website via the directory found at the following link:
www.invescoperpetual.co.uk/investmenttrusts.
The Annual General Meeting of the Company will be held at the offices of R&H
Fund Services (Jersey) Limited on 13 June 2013 at 10.30am.
By order of the Board
R&H Fund Services (Jersey) Limited
Company Secretary
28 March 2013
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